Is the "spring" for the big American banks coming?
As the credit card business, which has been hit hard by the epidemic, improves, the performance of large US banks, including JPM.US and C.US, may receive some boost.
In a period of economic stability, credit card business is one of the most profitable businesses for banks. However, when consumer spending fell sharply during the epidemic, the slowdown in the credit card business hit banks' performance. At the end of 2020, for example, quarterly revenue from Citi credit cards fell 13% from a year earlier.
Now, the continued rebound in credit card lending will bring some relief to banks. Federal Reserve data showAs of May 25, the total amount of credit cards and similar loans made by US banks increased by 15% from the same period last year, returning to pre-epidemic levels.
In additionThe better news for banks is that cardholders' credit card revolving balances are rising. This is crucial for banks because a higher revolving balance means higher interest-paying loans, which generate much higher income than transaction costs from merchants.
Barclays analyst Jason Goldberg points out that the most profitable part of the credit card business is the revolving balance. However, during the outbreak, consumers reduced credit card loans and revolving balances more than ever because of fiscal stimulus issued by the government and large amounts of cash from mortgage refinancing.
However, the situation has improved. The proportion of active accounts for credit card revolving balances has rebounded to 52.6 per cent in the past two quarters after falling to 51.3 per cent during the outbreak, while it has typically remained at about 60 per cent in the seven years before the outbreak, according to the American Bankers Association. Marianne Lake, head of consumer banking at JPMorgan, also pointed out in may that JPMorgan's revolving balance ratio was up 8 per cent from its low.
The data also show that credit card holders are currently repaying their debts at a slower rate, leading to an increase in the interest-bearing balance. Discover Financial Services said that the repayment rate is significantly higher than before the epidemic, has now stabilized, and even declined slightly in the first quarter.
Credit card users are also on the rise. With the lifting of epidemic prevention restrictions, banks stepped up credit card marketing last year and relaxed credit standards tightened in the early stages of the epidemic. According to data from TransUnion, a credit reporting agencyThe number of credit cards issued in the fourth quarter of 2021 rose 39 per cent to 21.5 million from a year earlier, an increase of 14 per cent from before the outbreak and an all-time high.
Marianne Lake says the younger generation in the US does not reject credit cards, with 60 per cent of the bank's millennials (born in 1984-1995) and generation Z (born in 1995-2009) paying through credit cards, and their loans will increase as they get older.
On the other hand, for banks, if the US economy does fall into recession as feared, shrinking consumer spending and an increase in non-performing loans could deal a fresh blow to the credit card business.
"Credit cards should be a very profitable business in the short term, but banks must be alert to the risk of recession," said Jason Goldberg, an analyst at Barclays.
Banks also say they have learned from previous financial crises that controlling lending to different parties is more important for profits than trying to predict a recession. Although Credit Card Repayment's delinquency rate has risen in the past three quarters, it is still lower than it was before the outbreak, according to Huanlian Bank. Data from the Federal Reserve also show that the write-off rate of banks' non-performing credit card loans rose from 1.57% to 1.82% in the first quarter, but the figure is only half of what it was before the epidemic, enough for banks to make money in this business.
